NotesECN741-page38 - Suppose we want to implement this...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
ECN 741: Public Economics Fall 2008 Next we check that under these allocations, the I.C. constraints for type L is slack. v y ( θ H ) θ L - v y ( θ L ) θ L = Z y ( θ H ) y ( θ L ) v y θ L dy > Z y ( θ H ) y ( θ L ) v y θ H dy = v y ( θ H ) θ H - v y ( θ L ) θ H = u ( c ( θ H )) - u ( c ( θ L )) rearrange terms u ( c ( θ L )) - v y ( θ L ) θ L > u ( c ( θ H )) - v y ( θ H ) θ L So, we know that our characterization is valid. Note that under this characterization 1 θ L v 0 y ( θ L ) θ L - u 0 ( c ( θ L )) = μ π ( θ H ) π ( θ L ) 1 θ H v 0 y ( θ L ) θ H - u 0 ( c ( θ L )) < μ π ( θ H ) π ( θ L ) 1 θ H v 0 y ( θ H ) θ H - u 0 ( c ( θ H )) < 0 and hence 1 θ L v 0 y ( θ L ) θ L < u 0 ( c ( θ L )) there is distortion for the low type.
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Suppose we want to implement this allocation with a nonlinear tax function T ( y ) . Let T ( y ) = y-c if y ∈ { y ( θ H ) ,y ( θ L ) } and T ( y ) = y otherwise. Consider the consumer’s problem max u ( c )-v µ y θ ¶ sub. to. c = y-T ( y ) FOC u ( c )(1-T ( y )) = 1 θ v µ y θ ¶ 38...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern